Want to compare car options? Try the Grindrod Index - Wisconsin Central Ltd.'s Bob Grindrod's method of purchasing railcars - column

Railway Age, July, 1990 by Anthony Kruglinski

Want to compare car options? Try the Grindrod Index

When was the last time your equipment was GI'd? No, I'm not talking about the kind of GI treatment that many of us received from Uncle Sam. In fact, you might have been GI'd and never even suspected it. Here's a clue. If you were one of the almost 19 boxcar owners who submitted railcars in response to a recent Wisconsin Central Ltd. Request For Proposal, you were GI'd. That's because the WCL's railcar czar, Bob Grindrod, uses his version of variable cost of investment/rate of return calculation to make railcar acquisition decisions for his 2,000 mile railroad. What do we call this calculation? You guessed it. It' the "Grindrod Index."

Now when I describe how one railroad car manager compares railcar opportunities, I'm sure I'm going to get a lot of groans from readers who have been using similar calculations to evaluate the profitability of railcar alternatives for years. I'm also sure that I'll receive reader responses that will find fault with Bob's way of doing things and offer alternative methods of coming up with a means of statistically evaluating railcar acquisition options, lease versus buy decisions and the like. We'll be the first to admit that there are other ways to accomplish the same type of analysis. However, if you are like Bob and are in a position where you are being offered railcars to purchase, railcars under proposed operating leases, and long term "finance" lease alternatives, you need some way of looking at these "offerings" and comparing them.

Before we get into the calculation itself, we'll have to note that anyone attempting to replicate this formula will need to know something about his or her company's ability to utilize the tax benefits of ownership and the terms and conditions under which the company can borrow to acquire the kinds of equipment being contemplated. If you are in a position to use the tax benefits of owning railcars, your scheme of valuing alternatives may be quite different.

For those of you who know something about the Wisconsin Central, you'll recognize it as the largest of the regional railroads and probably an eventual candidate for Class I status. Like most, if not all, of the regionals, its ability to absorb the tax benefits of equipment ownership is limited and as a result it recently undertook 18 year lease financing on 400 new 3,000 cubic foot covered hopper cars. So, let's say for the purpose of this article that a long term tax lease is a definite option for WCL--if they are offered the cars for sale. (The actual purchaser in this case would likely be a long term tax lessor designated by the railroad.) However, the best deal might be cars not offered for sale but offered under an operating lease.

For those of our readers who could stand a brief explanation on which type of lease is which, here goes:

Operating Leases. Leases whose terms meet accounting criteria for "non-balance sheet" treatment. In other words, leases which, from an accountant's point of view, don't look like financing transactions where the equipment is really being purchased.

Finance Leases. Leases that resemble an acquisition of the leased equipment, rather than a rental. For instance, a 60 month car lease whose payment and end-of-lease options resemble an installment financing.

Grindrod joined WCL in 1987 upon its organization and currently manages a railcar fleet of 4,800 cars (including 2,250 boxcars).

Bob's need for additional boxcars stems from a shift in car supply strategy at one of WCL's connecting short lines which will be receiving its boxcars from WCL rather than an existing lessor. With an almost 0% reject rate by its paper shippers, WCL was in the market for the best cars available at the best price. Here's where the Grindrod Index comes in. The almost 4,000 boxcars that were offered up by prospective lessors and sellers came in a wide variety of numbers and conditions, and at a wide variety of prices. The Grindrod Index provides the "commonality" in the process of making a determination on which were the best for the railroad.

Bob's index recognizes that:

First, everything you buy or lease has a cost to it. It has a cost to repair and refurbish and a cost to rent or purchase.

Second, like other types of equipment, railcars earn back (hopefully) more than their cost. Unlike most other types of equipment the nature and amount that railcars "earn" is generally prescribed by the AAR's car hire rules.

So here's how one railcar professional looks at the comparative costs and values in various railcar possibilities.

Bob looks at it in an equation:

Grindrod Index (GI) equals: Car Cost/Car Hire Earnings at 100% Off Line Utilization

Let's assume cars offered under a long term net lease (no service provided) will rent for $275 per month. Let's also assume that the car earns a per diem of $17.04 at 6.5[ per mile. We'll assume 50 miles traveled per day.

Here's how it figures:

$275/($17.04 X 30.42 days) (6.5[ X 50 miles X 30.42 days)